The Impact of Conflict and Political Instability on Banking Crises in Developing Countries

IMF Working Papers, February 28, 2020

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Conflicts and political instability are associated with higher probability of systemic banking crises.
The duration of a conflict is positively associated with rising probability of a banking crisis.
Conflicts and political instability in one country can have negative spillover effects on neighboring countries’ banking systems.
The primary channel of transmission from conflict or political instability to banking crises is the occurrence of fiscal crises following a conflict or political instability.

The paper investigates whether rising conflict and political instability globally over the past several decades led to increased occurrence of banking crises in developing countries.
Empirical approach draws on econometric analysis using Logit models to examine the occurrence of a banking crisis and systemic crises indicators.
Focus includes banking liquidity shortage, banking turmoil, and interactions with terms of trade and international trade.

Subject: Banking, Banking crises, Commercial banks, Econometric analysis, Financial crises, Financial institutions, International trade, Logit models, Systemic crises, Terms of trade
Keywords: banking crises; banking crises in year; banking crisis; banking liquidity shortage; banking turmoil; Commercial banks; conflict; countries matter; economic growth; experiencing banking crisis; fiscal crises; fiscal crisis; Global; government crisis; liquidity shortage; Logit models; occurrence of a banking crisis; occurrence of banking crisis; political instability; start of a banking crisis; state fragility index; Sub-Saharan Africa; systemic banking crisis; Systemic crises; terms of trade; Terms of trade; WP